The banking royal commission said APRA should put a greater emphasis on conduct risks in banks, as well as its primary focus on financial risks, and criticised the regulator for being too reluctant to take court action.
The review by deputy chairman John Lonsdale said the banking regulator had in some cases failed to address risks quickly enough because of insufficient attention it gave to enforcement. Its approach was also “out of step” with regulators in the United Kingdom and the United States.
“The recommendations of the review will still mean that APRA as a safety regulator remains focused on preventing harm with the use of non-formal supervisory tools. However, APRA will be more willing to use the full range of its formal powers – such as direction powers and licence conditions – to achieve prudential outcomes and deter unacceptable practices,” Mr Lonsdale said.
Mr Lonsdale’s report said APRA needed to have “effective working relationships” with banks during the global financial crisis, but since then, there had been a greater focus on cultural and behavioural risks in the industry.
It said behavioural standards presented a “particular challenge” for banking regulators around the world, because assessing behaviour required much more judgement than looking at purely financial risks. As a result, APRA had been “hesitant” to take enforcement action over behavioural risks, it said.
APRA accepted all of Mr Lonsdale’s recommendations, which included strengthening ties with ASIC; building a more “forceful supervisory culture”; setting up a committee to drive enforcement decision-making; and bolstering the legal powers and penalties available to APRA.